A STUDY ON SECURITIZATION –

CURRENT PRACTICES AND FUTURE PROSPECTSWITH SPECIAL REFERANCE TO BANKS HEADQUARTERED IN DELHI AND HARYANA

PRESENTED BYMUDASIR AHMED MIRTHE UNIVERSITY OF KASHMIR

CONTENTS OBJECTIVE OF THE STUDY. INTRODUCTION TO SECURITIZATION. SECURITIZATION IN INDIA. STUDY OF DATA ON SECURITIZATION IN BANKS

HEADQUARTERED WITHIN DELHI & HARYANA. RESULTS & RECOMMENDATIONS. LIMITATIONS OF THE STUDY. BIBLIOGRAPHY.

OBJECTIVE OF THE

STUDY

OBJECTIVE OF THE STUDYTHE STUDY IS CONDUCTED WITH THE OBJECTIVE OF PROVIDING AN INSIGHT INTO THE PREVALENT

PRACTICES AND FUTURE PROSPECTS FOR SECURITIZATION IN THE BANKS HEADQUARTERED

WITHIN THE AREA OF DELHI AND HARYANA. ACCORDINGLY, THE TERMS OF REFERENCE OF THE

STUDY ARE :

TO UNDERSTAND THE PREVALENT PRACTICES WITH RESPECT TO THE SECURITIZATION

MARKET IN THE AREA UNDER STUDY.

TO REVIEW THE IMPACT OF ENFORCEMENT OF PROVISIONS OF SARFAESI ACT AND OTHER

REGULATIONS.

TO ASCERTAIN WHETHER THE BANKS IN THE AREA UNDER STUDY ARE RESORTING TO SINGLE

LOAN SECURITIZATION AND THE RELATED TREATMENT GIVEN TO PROFIT/LOSS ON SUCH

SALES.

TO IDENTIFY ANY SECURITIZATION DEAL WITH EMBEDDED CREDIT DERIVATIVES OR ANY

OTHER SYNTHETIC SECURITIZATION STRUCTURE.

TO CHECK FOR INSTANCES WHERE THE SPVS CREATED BY BANKS HAVE ISSUED SHORT-TERM

PASS-THROUGH CERTIFICATES BACKED BY LONG-TERM ASSETS IN ORDER TO GAUGE THE

METHOD EMPLOYED TO MANAGE ANY RESULTANT ASSET-LIABILITY MISMATCH.

INTRODUCTION TOSECURITIZATION

ORIGINATION OF THE CONCEPT

THE ORIGINATE-TO-DISTRIBUTE MODEL.

A VARIATION OF TRADITIONAL ORIGINATE-TO-HOLD MODEL.

INTERMEDIARIES ORIGINATE LOANS WITH THE INTENTION OF

TRANSFERRING THE ASSET AND ITS COMMENSURATE RISK

OUT OF THEIR BALANCE SHEET TO ANOTHER ENTITY.

SEPARATION OF RISK ORIGINATION FROM AGGREGATION.

SECURITIZATION DEFINED

A PROCESS OF POOLING AND REPACKAGING OF

HOMOGENOUS ILLIQUID FINANCIAL ASSETS INTO

MARKETABLE SECURITIES THAT CAN BE SOLD TO INVESTORS.

A CREDIT ARBITRAGE TRANSACTION THAT PERMITS FOR

MORE EFFICIENT MANAGEMENT OF RISKS BY ISOLATING A

SPECIFIC POOL OF ASSETS FROM THE ORIGINATOR'S BALANCE

SHEET

MAJOR STEPS

1) CREATION OF A SPECIAL PURPOSE VEHICLE (SPV) TO HOLD

THE FINANCIAL ASSETS UNDERLYING THE SECURITIES;

2) SALE OF THE FINANCIAL ASSETS BY THE ORIGINATOR OR

HOLDER OF THE ASSETS TO THE SPECIAL PURPOSE VEHICLE,

WHICH WILL HOLD THE ASSETS AND REALIZE THE ASSETS;

3) ISSUANCE OF SECURITIES BY THE SPV, TO INVESTORS,

AGAINST THE FINANCIAL ASSETS HELD BY IT.

STRUCTURE OF SECURITIZATION

STAGES IN THE PROCESS OF SECURITIZATION

THE ORIGINATOR DETERMINES WHICH ASSETS HE WANTS TO SECURITIZE FOR RAISING

FUNDS.

THE SPV IS FORMED.

THE SPV IS FUNDED BY INVESTORS AND ISSUES SECURITIES TO THE INVESTORS.

THE SPV ACQUIRES THE RECEIVABLES UNDER AN AGREEMENT AT THEIR DISCOUNTED

VALUE.

THE SERVICER FOR THE TRANSACTION IS APPOINTED, NORMALLY THE ORIGINATOR.

THE DEBTORS ARE /ARE NOT NOTIFIED DEPENDING ON THE LEGAL REQUIREMENTS.

THE SERVICER COLLECTS THE RECEIVABLES, USUALLY IN AN ESCROW MECHANISM, AND

PAYS OFF THE COLLECTION TO THE SPV.

SECURITIZATION PROCESS (cntd…..)

THE SPV EITHER PASSES THE COLLECTION TO THE INVESTORS, OR REINVESTS

THE SAME TO PAY OFF TO INVESTORS AT STATED INTERVALS.

IN CASE OF DEFAULT, THE SERVICER TAKES ACTION AGAINST THE DEBTORS AS

THE SPV’S AGENT.

WHEN ONLY A SMALL AMOUNT OF OUTSTANDING RECEIVABLES ARE LEFT TO

BE COLLECTED, THE ORIGINATOR MAY CLEAN UP THE TRANSACTION BY

BUYING BACK THE OUTSTANDING RECEIVABLES.

AT THE END OF THE TRANSACTION, THE ORIGINATOR’S PROFIT, IF RETAINED

AND SUBJECT TO ANY LOSSES TO THE EXTENT AGREED BY THE ORIGINATOR, IN

THE TRANSACTION IS PAID OFF.

PARTIES INVOLVED

MAIN PARTIES1. THE ORIGINATOR: THE ENTITY ON WHOSE BOOKS THE

ASSETS TO BE SECURITIZED EXIST.

2. THE SPECIAL PURPOSE VEHICLE (SPV): THE ENTITY,

WHICH BUYS THE ASSETS TO BE SECURITIZED FROM THE

ORIGINATOR.

3. THE INVESTORS: THE ENTITIES WHO INVEST IN THE

SECURITIES.

PARTIES INVOLVED (contd…)

OTHER PARTIES THE OBLIGOR/S: THE ORIGINATOR'S DEBTOR THAT IS THE BORROWER OF THE

ORIGINAL LOAN.

THE RATING AGENCY : THE AGENCY THAT RATES THE STRUCTURE.

ADMINISTRATOR OR SERVICER: THE PARTY THAT COLLECTS THE PAYMENT DUE

FROM THE OBLIGOR/S AND PASSES IT TO THE SPV, FOLLOWS UP WITH DELINQUENT

BORROWERS AND PURSUES LEGAL REMEDIES AVAILABLE AGAINST THE

DEFAULTING BORROWERS.

AGENT AND TRUSTEE: THE PARTY THAT ACCEPTS THE RESPONSIBILITY FOR

OVERSEEING THAT ALL OTHER THE PARTIES TO THE SECURITIZATION DEAL

PERFORM IN ACCORDANCE WITH THE SECURITIZATION TRUST AGREEMENT.

STRUCTURER: THE PARTY THAT BRINGS TOGETHER THE OTHER PARTIES REQUIRED

TO EXECUTE A SECURITIZATION DEAL.

PARTIES INVOLVED (contd…)

THE REGULATORS WHOSE PRINCIPAL CONCERNS RELATE TO CAPITAL

ADEQUACY, LIQUIDITY, AND CREDIT QUALITY OF THE STRUCTURE, AND

BALANCE SHEET TREATMENT OF THE TRANSACTION.

CREDIT ENHANCER: THE PARTY THAT PROVIDES A COVER TO SPV OR INVESTORS

IN RESPECT OF ANY FUTURE LOSSES ASSOCIATED WITH THE POOL OF ASSETS.

LIQUIDITY PROVIDER: THE PARTY THAT PROVIDES THE FACILITY TO HELP

SMOOTHEN THE TIMING DIFFERENCES FACED BY THE SPV BETWEEN THE RECEIPT

OF CASH FLOWS FROM THE UNDERLYING ASSETS AND THE PAYMENTS TO BE

MADE TO INVESTORS.

SPECIALIST FUNCTIONARIES SUCH AS LEGAL AND TAX COUNSELS,

ACCOUNTING FIRMS, POOL AUDITORS, ETC.

TYPES OF SECURITIZATION

TYPES OF SECURITIZATION

ASSET BACKED SECURITIZATION

FUTURE FLOW SECURITIZATION

TYPES OF SECURITIZATION (contd…)

ASSET BACKED SECURITIZATION: ASSET BACKED

SECURITIZATION INVOLVES THE CONVERSION OF

EXISTING ASSETS INTO MARKETABLE SECURITIES.

FUTURE FLOW SECURITIZATION: FUTURE FLOW

SECURITIZATION INVOLVES THE CONVERSION OF FUTURE

CASH FLOWS INTO MARKETABLE SECURITIES.

TYPES OF SECURITIZATION STRUCTURE

TYPES OF SECURITIZATION STRUCTURE

CASH FLOW STRUCTURE

SYNTHETIC STRUCTURE

TYPES OF SECURITIZATION STRUCTURE (contd…)

IN A CASH FLOW-BASED SECURITIZATION, THE OWNERSHIP

OF THE ASSETS WHOSE CASH FLOWS ARE TO BE SECURITIZED,

ARE ACTUALLY TRANSFERRED TO THE SPV.

IN A SYNTHETIC” SECURITIZATION, THE CASH FLOWS

AND/OR ECONOMIC EXPOSURE ARE TRANSFERRED TO THE

SPV THROUGH THE USE OF A CREDIT DERIVATIVE.SYNTHETIC

SPVS DO NOT ASSUME ACTUAL OWNERSHIP OF ANY ASSETS.

SECURITIES ISSUED BY SPV

ON THE BASIS OF UNDERLYING

ASSET BACKED SECURITIES

MORTGAGE BACKED SECURITIES

SECURITIES ISSUED BY SPV (contd…)

ON THE BASIS OF UNDERLYING

ASSET BACKED SECURITIES (ABS): SECURITIES ISSUED BY SPV IN A

SECURITIZATION TRANSACTION ARE REFERRED TO AS ASSET BACKED

SECURITIES (ABS) BECAUSE INVESTORS RELY ON THE PERFORMANCE OF

THE ASSETS THAT COLLATERALIZE THE SECURITIES. THE ASSET IN

QUESTION COULD VARY FROM AUTO LOAN/LEASE/HIRE PURCHASE, CREDIT

CARD, CONSUMER LOAN, STUDENT LOAN, HEALTHCARE RECEIVABLES AND

TICKET RECEIVABLES TO EVEN FUTURE ASSET RECEIVABLES.

MORTGAGE BACKED SECURITIES (MBS): MORTGAGE BACKED

SECURITIES (MBS) ARE THE SECURITIES BACKED BY MORTGAGE LOANS

THAT IS LOANS SECURED BY SPECIFIED REAL ESTATE PROPERTY, WHEREIN

THE LENDER HAS THE RIGHT TO SELL THE PROPERTY, IF THE BORROWER

DEFAULTS.

SECURITIES ISSUED BY SPV (contd…)

ON THE BASIS OF STRUCTURE PASS-THROUGH CERTIFICATES: PASS-THROUGH

CERTIFICATES ARE IN THE NATURE OF PARTICIPATION

CERTIFICATES THAT ENABLE THE INVESTORS TO TAKE A DIRECT

EXPOSURE ON THE PERFORMANCE OF THE SECURITIZED

ASSETS.

PAY-THROUGH CERTIFICATES: PAY –THROUGH

CERTIFICATES GIVE INVESTORS ONLY A CHARGE AGAINST THE

SECURITIZED ASSETS, WHILE THE ASSETS THEMSELVES ARE

OWNED BY THE SPV.

CREDIT ENHANCEMENT

CREDIT ENHANCEMENT REFERS TO ANY ACTIVITY THAT

AIMS AT REDUCING THE RISK ASSOCIATED WITH

SECURITIZED INSTRUMENTS AND INCREASING THE

CREDITWORTHINESS OF THE SPV ISSUING SUCH

FINANCIAL INSTRUMENTS.

CREDIT ENHAANCEMENT CAN BE OF TWO TYPES:

1. INTERNAL CREDIT ENHANCEMENT

2. EXTERNAL CREDIT ENHANCEMENT.

TYPES OF CREDIT ENHANCEMENT

INTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT

ENHANCEMENT PROVIDED INTERNALLY BY THE SPV.

TYPES OF INTERNAL CREDIT ENHANCEMENT:

EXCESS SPREAD.

OVERCOLLATERALIZATION.

RESERVE ACCOUNT.

CREDIT TRANCHING.

CASH COLLATERAL.

TYPES OF CREDIT ENHANCEMENT

EXTERNAL CREDIT ENHANCEMENT REFERS TO CREDIT

ENHANCEMENT PROVIDED BY THIRD PARTIES.

TYPES OF EXTERNAL CREDIT ENHANCEMENT:

LETTR OF CREDIT.

INSURANCE.

THIRD PARTY GUARANTEE.

CASH COLLATERAL ACCOUNT.

ADVANTAGES OF SECURITIZATION

ADVANTAGES TO THE ORIGINATOR

ADVANTAGES TO THE INVESTOR

LIQUIDITY

REDUCTION IN ASSET-LIABILTY

MISMATCH.

REDUCED FUNDING COSTS.

LOWER CAPITAL REQUIREMENTS.

TRANSFER OF RISKS.

CONVERSION OF NON-MARKETABLE

ASSETS INTO MARKETABLE

SECURITIES.

WIDER MARKET ACCESS.

LOW EVENT RISK.

STRUCTURED ISSUANCES.

HIGHER YIELDS FO

SIMILAR/LOWER RISK.

DIVERSIFICATION OF INVESTMENT

OPPORTUNITIES

DISADVANTAGES OF SECURITIZATION

DISADVANTAGES TO THE ORIGINATOR

DISADVANTAGES TO THE INVESTOR

REDUCTION IN PORTFOLIO

QUALITY.

INCREASED COSTS.

SIZE LIMITATIONS.

LOWER CAPITAL

REQUIREMENTS.

RISKS OF IMPAIRMENT.

EXPOSURE TO CREDIT RISK.

RISK OF PREPAYMENT.

REINVESTMENT RISK.

COMMINGLING RISK.

SEVICER RISK.

RISKS TO THE FINANCIAL SYSTEM

REPLACES ONE INTERMEDIARY WITH MANY.

SEGREGATES RISK ORIGINATION FROM RISK

AGGREGATION.

ENCOURAGES TRANSFER OF RISK WHICH RESULTS

IN POOR RISK HANDLING MEASURES.

RECENT GLOBAL FINANCIAL CRISES WHICH

DISCLOSED FAILURE OF CREDIT RATING AGENCIES.

SECURITIZATION IN INDIA

SECURITIZATION IN INDIA THE FIRST SECURITIZATION TRANSACTION IN INDIA WAS

COMPLETED IN 1991.

SECURITIZATION HAS BECOME A SOLID SOURCE OF FUNDING VIA THE CAPITAL MARKETS IN INDIA. ALTHOUGH THE MARKET REMAINS PREDOMINANTLY DOMESTIC, WITH RATINGS ASSIGNED WITHIN THE NATIONAL SCALE, EFFORTS TO ACCESS THE INTERNATIONAL CAPITAL MARKETS ARE BEING EXPLORED BY LARGER ORIGINATORS.

THE GROWTH IN THE INDIAN SECURITIZATION MARKET HAS BEEN LARGELY FUELLED BY THE REPACKAGING OF RETAIL ASSETS AND RESIDENTIAL MORTGAGES OF BANKS AND FINANCIAL INSTITUTIONS (FIS).

ASSET BACKED SECURITIZATION (ABS) IS THE LARGEST PRODUCT CLASS.THE MORTGAGE BACKED SECURITIES (MBS) MARKET HAS BEEN RATHER SLOW IN TAKING OFF DESPITE A GROWING HOUSING FINANCE MARKET DUE TO THE LONG MATURITY PERIODS AND THE RISK ARISING FROM PREPAYMENT / REPRICING OF THE UNDERLYING LOAN.

SECURITIZATION IN INDIA (contd…) SECURITIZATION IN INDIA LARGELY ADOPTS A TRUST STRUCTURE WITH THE

UNDERLYING ASSETS BEING TRANSFERRED BY WAY OF SALE TO A TRUSTEE

COMPANY. THE SPV, FORMED AS A TRUSTEE COMPANY, ISSUES SECURITIES

THAT ARE EITHER PASS THROUGH CERTIFICATES OR PAY THROUGH

CERTIFICATES (PTC). THE TRUSTEE IS THE LEGAL OWNER OF THE UNDERLYING

ASSETS IN BOTH THE SCENARIOS.

ISSUANCE VOLUME BY NUMBER OF TRANSACTIONS IS SIGNIFICANT IN INDIA,

WITH DOZENS OF DEALS COMING TO MARKET EACH YEAR ACROSS ALL ASSET

CLASSES. YET SIGNIFICANT GROWTH POTENTIAL WITHIN THIS MARKET

REMAINS, WITH PUBLIC SECTOR BANKS STILL NOT HAVING ENTERED THE

SECURITIZATION ARENA.

REGULATIONS RELATED TO SECURITIZATION IN INDIA

INDIAN FINANCIAL MARKETS HAVE BEEN WITNESSING SECURITIZATION DEALS

SINCE 1990 WITH THE FIRST SECURITIZATION DEAL TAKING PLACE CITIBANK AND

GIC MUTUAL FUND IN 1991 FOR RS 160 MILLION. ON THE LINES OF SECURITIZATION,

TWO MAJOR TYPES OF FINANCIAL TRANSACTIONS CAN BE WITNESSED IN INDIAN

MARKETS:

SECURITIZATION OF STANDARD ASSETS.

SALE OF NPAS TO RC/SCS AND/OR BANKS/FIS.

THE SECURITIZATION OF STANDARD ASSETS INVOLVES THE CORE PROCESS OF

SECURITIZATION WHEREBY AN ORGANIZATION CHERRY PICKS LOAN ASSETS AND

SELLS THEM TO AN SPV WHICH IN TURN ISSUES SECURITIES TO INVESTORS AGAINST

SUCH LOAN ASSETS. ON THE OTHER HAND, THE SALE OF NPAS TO RC/SCS OR OTHER

FIS INVOLVES THE SELLING OF DISTRESSED LOANS TO THESE INSTITUTIONS BY

BANKS/FIS AND GETTING THEIR BALANCE SHEET CLEARED OF NPAS.

REGULATIONS RELATED TO SECURITIZATION IN INDIA (contd…)

THE MOST SIGNIFICANT STEP TOWARDS REGULATION OF

SECURITIZATION MARKET WAS THE ENACTMENT OF SARFAESI ACT IN

2002.

OTHER MAJOR STEPS WERE THE ISSUANCE OF :

THE SECURITISATION COMPANIES AND RECONSTRUCTION

COMPANIES (RESERVE BANK) GUIDELINES AND DIRECTIONS IN 2003.

GUIDELINES ON PURCHASE/SALE OF NON PERFORMING ASSETS

DATED 13 JULY 2005.

GUIDELINES ON SECURITISATION OF STANDARD ASSETS DATED

FEBRUARY 1, 2006.

SARFAESI ACT, 2002 THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND

ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFAESI ACT) IS A MIX OF

THREE DIFFERENT THINGS -

SECURITISATION,

ASSET MANAGEMENT COMPANIES AND

ENFORCEMENT OF SECURITY INTERESTS ON LOAN DEFAULTS TO BANKS.

THE BASIC INTENTION BEHIND THIS ACT IS TO STRENGTHEN CREDITOR

RIGHTS THROUGH FORECLOSURE AND ENFORCEMENT OF SECURITIES BY

BANKS AND FINANCIAL INSTITUTIONS. BY CONFERRING ON LENDERS THE

RIGHT TO SEIZE AND SELL ASSETS HELD AS COLLATERAL IN RESPECT OF

OVERDUE LOANS, IT ALLOWS BANKS AND FINANCIAL INSTITUTIONS TO

RECOVER THEIR DUES PROMPTLY WITHOUT GOING THROUGH A COSTLY AND

TIME-CONSUMING LEGAL PROCESS.

SARFAESI ACT (contd…)

THE ACT CONTAINS VI CHAPTERS AND 42 SECTIONS:

CHAPTER I - PRELIMINARY SHORT TITLE AND COMMENCEMENT.

CHAPTER II - REGULATION OF SECURITISATION & RECONSTRUCTION OF

FINANCIAL ASSETS OF BANKS & FINANCIAL INSTITUTIONS.

CHAPTER III - ENFORCEMENT OF SECURITY INTEREST.

CHAPTER IV - CENTRAL REGISTRY.

CHAPTER V - OFFENCES AND PENALTIES.

CHAPTER VI - MISCELLANEOUS.

THE ACT ADDRESSED TWO MAJOR ISSUES:

1. ASSET RECONSTRUCTION.

2. ENFORCEMENT OF SECURITY INTEREST.

SARFAESI ACT (contd…) THE SARFAESI ACT AIMED AT ERADICATING THE SHORTCOMINGS OF ALL

THE PREVIOUS LEGISLATIONS FOR RECOVERY OF DEBTS AND TO BRING

THE FINANCIAL INSTITUTIONS AT PAR WITH THE REST OF THE WORLD BY

STRESSING MORE ON THE RECOVERY PART RATHER THAN

ASCERTAINMENT PART FOR DUES

THE CONCEPT OF AN ARC (ASSET RECONSTRUCTION COMPANY) WAS

INTRODUCED IN THIS ACT.

THE INTENT OF THE ACT FOCUSES ON THE BAD LOANS ARISING OUT OF

A SYSTEMATIC BANKING CRISIS IN THE COUNTRY AND NOT ON THE BAD

LOANS ORIGINATING FROM BAD LENDINGS IN THE USUAL BANKING

OPERATIONS.

THE ACT ALSO EMPOWERS SECURED CREDITORS TO ENFORCE THEIR

SECURITY INTEREST IN THE ASSETS WITHOUT THE INTERVENTION OF

THE COURT.

THE SECURITISATION COMPANIES AND RECONSTRUCTION COMPANIES (RESERVE BANK) GUIDELINES AND DIRECTIONS

TREATMENT OF NPA’S.

REGISTRATION OF SC/RCs AND

MATTERS INCIDENTAL THERETO.

OWNED FUND.

PERMISSIBLE BUSINESS.

ASSET RECONSTRUCTION

SECURITISATION

CAPITAL ADEQUACY

REQUIREMENTS.

DEPLOYMENT OF FUNDS.

ACCOUNTING YEAR.

ASSET CLASSIFICATION.

INVESTMENTS.

INCOME RECOGNITION.

DISCLOSURES IN THE BALANCE SHEET.

INTERNAL AUDIT

EXEMPTIONS

THESE GUIDELINES ISSUED BY THE RBI IN 2003 COVERED THE MAJOR ASPECTS REALATING TO SECURITIZATION DELAS. THE MAIN PROVISIONS ARE:

EXCEPTIONS TO SECURITIZATION A LIEN ON ANY GOODS, MONEY OR SECURITY GIVEN BY OR UNDER THE

INDIAN CONTRACT ACT OR THE SALE OF GOODS ACT OR ANY OTHER LAW FOR THE TIME BEING IN FORCE.

A PLEDGE OF MOVABLES. CREATION OF ANY SECURITY IN ANY AIRCRAFT AND ANY VESSEL. ANY CONDITIONAL SALE, HIRE PURCHASE OR LEASE OR ANY OTHER

CONTRACT IN WHICH NO SECURITY INTEREST HAS BEEN CREATED. ANY SECURITY INTEREST FOR SECURING REPAYMENT OF ANY FINANCIAL

ASSET, NOT EXCEEDING RS. 1,00,000. ANY SECURITY INTEREST CREATED IN AGRICULTURAL LAND. ANY CASE IN WHICH THE AMOUNT DUE IS LESS THAN 20% OF THE PRINCIPAL

AMOUNT AND ANY RIGHTS OF AN UN-PAID SELLER AND ANY PROPERTY NOT LIABLE TO

ATTACHMENT OR SALE AS PER THE CIVIL PROCEDURE CODE.

CHARACTERISTICS OF THE INDIAN SECURITIZATION MARKET

THE MAIN CHARACTERISTICS OF INDIAN SECURITIZATION MARKET ARE:

INDIA IS A SIGNIFICANT SECURITIZATION MARKET IN ASIA AND IT DISPLAYS A SET

OF UNIQUE FEATURES THAT DISTINGUISH IT FROM OTHER JURISDICTIONS.

SENIOR NOTES ARE GENERALLY ENHANCED THROUGH A CASH RESERVE OR

GUARANTEE PROVIDED BY A HIGHLY RATED INSTITUTION.

NATIONAL RATINGS IN INDIA DENOTE TIMELY PAYMENT OF INTEREST AS WELL AS

PRINCIPAL. THIS IS PROBABLY THE MAIN DIFFERENCE TO MOST OTHER

JURISDICTIONS, WHERE GENERALLY ONLY TIMELY PAYMENT OF INTEREST

APPLIES.

THE INVESTOR BASE IS LIMITED, COMPRISING MUTUAL FUNDS, INSURANCE

COMPANIES, NBFCS AND A FEW PRIVATE SECTOR BANKS.

MOST INVESTMENTS IN SECURITIZED PAPER ARE MADE ON A “HOLD TO MATURITY”

BASIS ALTHOUGH PASS-THROUGH CERTIFICATES ARE NOW RECOGNIZED AS

SECURITIES AND ACTIVELY TRADED ON STOCK EXCHANGES.

SOME MAJOR SECURITIZATION DEALS IN INDIA:

FIRST SECURITIZATION DEAL IN INDIA BETWEEN CITIBANK AND

GIC MUTUAL FUND IN 1991 FOR RS 160 MILLION.

L&T RAISED RS 4,090 MILLION THROUGH THE SECURITIZATION

OF FUTURE LEASE RENTALS TO RAISE CAPITAL FOR ITS POWER

PLANT IN 1999.

INDIA’S FIRST SECURITIZATION OF PERSONAL LOAN BY

CITIBANK IN 1999 FOR RS 2,841 MILLION.

INDIA’S FIRST MORTGAGE BACKED SECURITIES ISSUE (MBS) OF

RS 597 MILLION BY NHB AND HDFC IN 2001.

SECURITIZATION OF AIRCRAFT RECEIVABLES BY JET AIRWAYS

FOR RS 16,000 MILLION IN 2001 THROUGH OFFSHORE SPV.

INDIA’S FIRST SALES TAX DEFERRALS SECURITIZATION BY

GOVERNMENT OF MAHARASHTRA IN 2001 FOR RS 1,500 MILLION. .

MAJOR SECURITIZATION DEALS IN INDIA (contd…)

INDIA’S FIRST DEAL IN THE POWER SECTOR BY KARNATAKA ELECTRICITY BOARD

FOR RECEIVABLES WORTH RS 1,940 MILLION AND PLACED THEM WITH HUDCO.

INDIA’S FIRST COLLATERALIZED DEBT OBLIGATION (CDO) DEAL BY ICICI BANK IN

2002

INDIA’S FIRST FLOATING RATE SECURITIZATION ISSUANCE BY CITIGROUP OF RS

2,810 MILLION IN 2003. THE FIXED RATE AUTO LOAN RECEIVABLES OF CITIBANK

AND CITICORP FINANCE INDIA INCLUDED IN THE SECURITIZATION

INDIA’S FIRST SECURITIZATION OF SOVEREIGN LEASE RECEIVABLES BY INDIAN

RAILWAY FINANCE CORPORATION (IRFC) OF RS 1,960 MILLION IN 2005. THE

RECEIVABLES CONSISTED OF LEASE AMOUNTS PAYABLE BY THE MINISTRY OF

RAILWAYS TO IRFC

INDIA’S LARGEST SECURITIZATION DEAL BY ICICI BANK OF RS 19,299 MILLION IN

2007. THE UNDERLYING ASSET POOL WAS AUTO LOAN RECEIVABLES.

SKS ENTERS INTO RS 200 CRORES SECURITIZATION DEAL WITH ICICI BANK IN 2009.

STUDY OF DATA

RESEARCH METHODOLOGY THE CURRENT STUDY IS A DESCRIPTIVE ONE DESIGNED TO EVALUATE

THE PRESENT SITUATION OF SECURITIZATION AND ITS FUTURE

PROSPECTS. THE RESEARCH IS FOCUSED ON THE BANKS

HEADQUARTERED IN DELHI AND HARYANA REGION.

THE RESEARCH WAS CARRIED BY QUESTIONNAIRE METHOD . THE

QUESTIONNAIRE WAS DRAFTED TO HIGHLIGHT THE BASIC ISSUES OF THE

SECURITIZATION DEALS ENTERED INTO BY THE BANKS IN ACCORDANCE

WITH THE ISSUES UNDER STUDY. THE QUESTIONS WERE BOTH CLOSE-

ENDED AND OPEN-ENDED.

IN ADDITION TO QUESTIONNAIRE, INFORMATION WAS ALSO GATHERED

BY WAY OF ONE-ON-ONE DISCUSSION WITH THE PEOPLE FROM VARIOUS

OTHER DEPARTMENTS OF THE RESPECTIVE BANKS, ASKING THEIR VIEWS

ABOUT THE GIVEN TOPIC.

DATA COLLECTIONAS THE FOCUS OF THE STUDY WAS THE SITUATION OF SECURITIZATION IN

THE BANKS HEADQUARTERED IN DELHI AND HARYANA REGION, THE DATA

WAS COLLECTED FROM THE RESPECTIVE BANKS. THE REGION OF DELHI

HEADQUARTERS FIVE BANKS:

PUNJAB NATIONAL BANK (PNB) -PUBLIC SECTOR BANK

ORIENTAL BANK OF COMMERCE (OBC) -PUBLIC SECTOR BANK

PUNJAB AND SINDH BANK(P&SB) - PUBLIC SECTOR BANK

CHINA TRUST BANK(CTBC) - FOREIGN BANK

BANK OF TOKYO AND MITSUBISHI - FOREIGN BANK

OUT OF THE BANKS MENTIONED ABOVE, A SAMPLE OF THREE BANKS VIZ PUNJAB

NATIONAL BANK, PUNJAB AND SINDH BANK AND ORIENTAL BANK OF COMMERCE

WAS STUDIED. A WELL DESIGNED QUESTIONNAIRE WAS ADMINISTERED TO ALL THE

THREE BANK RESPONDENTS TO GATHER INFORMATION ABOUT SECURITIZATION DEALS

AND OTHER RELATED ASPECTS.

Issue Punjab National Bank Oriental Bank of Commerce

Punjab & Sindh Bank

Active in Securitization Yes Yes Yes

Category of loan assets sold

NPA NPA NPA

Type of securitization ABS & MBS ABS ABS & MBS

Method of SecuritizationBoth Single Loan & Portfolio Approach

Both Single Loan & Portfolio Approach

Only Single loan Approach

Increase in Single Loan Sell downs

Yes Yes Yes

Treatment of Profit/Loss As per RBI guidelines As per RBI guidelines As per RBI guidelines

Criterion for selection of loans to be sold

Age of account. Recoverability.

Recoverability Type of loan

Decision making authority

Head Office Head office Head office. Zonal Offices ( Upto a limit)

Assets sold to RC/SCs Only ARCIL RC/SCs, Banks, NBFCs.

Securitization of Standard Assets

No No No

Types of Securities issued

None None None

ANALYSIS OF DATA

Asset-Liability mismatch due to issue of PTCs

No No No

Securitization deal with synthetic structures

No No No

Preferred Geographical Location of accounts to be sold

None NoneWhere stamp duties are

least

Impact of SARFAESI Act on Credit Appraisal

Positive but only in case of small and medium

borrowersPositive

Positive but only in case of small and medium

borrowers

Impact of the act on Recovery Climate

Positive Positive Positive

Main motives behind securitization/ sale

Cleaning of Balance Sheet.

Capital relief Resolution of NPAs

Clearance of Balance Sheet

Reduction of NPAs Capital relief

Recovery. Clearance of Balance

Sheet

Major impediments

Stamp Duties Reserve Price Treatment of Non-

Funded accounts

Low price offered by ARCs

Stamp duties Court Intervention

ANALYSIS OF DATA (contd…)

MAJOR ISSUES

TWO MAJOR ISSUES

SECURITIZATION OF STANDARD ASSETS

SALE OF NON-PERFORMING ASSETS

ISSUE I – SECURITIZATION OF STANDARD ASSETS

NOT PRACTICED BY THE BANKS UNDER STUDY. REASONS CITED

NO INCENTIVE. ENOUGH LIQUIDITY.

ADEQUATE CAPITAL.

HOWEVER: ADEQUATE CAPITAL AT PRESENT WON’T SERVE FUTURE GROWTH

OBJECTIVE. LIQUIDITY IS A SHORT TERM PHENOMENON. FUNDS LYING IDLE IN BALANCE SHEETS CAN BE PUT TO BETTER

USES.

ISSUE II – SALE OF NPAs

PRACTICED BY THE BANKS UNDER STUDY.

REASONS CITED RECOVERY OF BAD DEBTS. CLEARANCE OF BALANCE SHEET. CAPITAL RELIEF. RECYCLING OF FUNDS.

HOWEVER: USED WITH THE SOLE INTENTION OF CLEARING BALANCE

SHEETS. THE SPIRIT OF DISTRESSED LOAN RESTRUCTURING LOST. ARCs ACTING FOR THEIR OWN INTEREST.

RESULTS AND

RECOMMENDATIONS

RESULTS NO BANK IN THE AREA UNDER STUDY HAS UNDERTAKEN

SECURITIZATION OF STANDARD ASSETS AND ALL OF THE BANKS HAVE

UNDERTAKEN SALE OF DISTRESSED ASSETS ONLY.

IN REFERENCE TO THE SECURITIZATION/SALE OF NPAS, THE AMOUNT OF

SINGLE LOAN DEALS HAS INCREASED CONSIDERABLY.

THE GAINS ON SINGLE LOAN SECURITIZATION/SALE ARE DEALT IN

ACCORDANCE WITH RBI GUIDELINES.

KEEPING IN ACCORDANCE WITH THE RBI GUIDELINES, NONE OF THE

BANKS UNDER STUDY HAS BEEN INVOLVED IN ANY SECURITIZATION

STRUCTURE HAVING EMBEDDED DERIVATIVES OR ANY SYNTHETIC

SECURITIZATION STRUCTURE.

RESULTS (contd…) NO INSTANCE OF ISSUANCE OF PTCS AGAINST SECURITIZATION OF STANDARD

ASSETS AS SUCH NO INSTANCE OF ASSET-LIABILITY MISMATCH CAUSED BY

ISSUANCE OF SHORT-TERM PTCS BACKED BY LONG-TERM ASSETS.

POSITIVE IMPACT OF SARFAESI ACT ON RECOVERY CLIMATE, CREDIT

APPRAISAL, CREDIT FOLLOW-UP AND CREDIT POLICY MAKING.

THE MAIN MOTIVES FOR THE BANKS UNDER STUDY BEHIND

SECURITIZATION/SALE OF NPAS ARE:

CLEANSING OF BALANCE SHEET.

RECOVERY OF NPAS WITH MAXIMUM VALUE AND MINIMUM COST.

RECYCLING OF FUNDS.

CAPITAL RELIEF.

RISK REDUCTION.

RESULTS (contd…) MAIN IMPEDIMENTS FACED BY BANKS FOR SALE OF

NPAs: STAMP DUTY DISCRIMINATION.

DISPUTE ON RESERVE PRICE.

LESS NUMBER OF ARCs.

UNNECESSARY COURT INTERVENTION IN RECOVER PROCESS.

LESS CREDITWORTHINESS OF BORROWERS.

EXCLUSION OF AGRICULTURAL LAND AND RENTED PROPERTY FROM THE PURVIEW OF

SARFAESI ACT.

MAJOR SHORTCOMINGS IN PSBS CAUSING HINDRANCE FOR SECURITIZATION OF STANDARD ASSETS:

LACK OF COMPUTERISED DATA MANAGEMENT SYSTEMS.

LACK OF PROACTIVISM.

IGNORANCE OF PROVISIONS OF SECURITIZATION.

LESS BREADTH AND DEPTH OF MARKET.

LACK OF EXPERTS IN THE FIELD.

RECOMMENDATIONS DIRECTON TO PSBs TO INITIATE SECURITIZATION OF STANDARD ASSETS.

DIRCTION TO PSBs TO INSTALL HIGHLY INTEGRATED ACCOUNTING INFORMATION

SYSTEMS.

PSBs DIRECTED TO DEVELOP EXPERTS IN THE DIELD OF SECURITIZATION.

MARKET BREADTH AND DEPTH FOR SECURITIZATION DEALS.

INCREASED BY ALLOWING MORE INVESTORS TO PARTICIPATE IN THE SECURITIZED PAPER.

REDUCTION IN STAMP DUTIES .

AMENDMENTS IN TRANFER OF PRPERTY ACT AND STAMP DUTY ACT.

AGRICULTURAL LAND TO BE BROUGHT UNDER PURVIEW OF SARFAESI ACT.

NUMBER OF ARCS INCREASED.

WORKING OF EXISTING ARCs TO BE PUT UNDER SCANNER.

INTRODUCTION OF CMBS.

LIMITATIONS OF THE STUDY

LIMITATIONS

RESEARCH CARRIED WITH VARIABLES ACTING ON

RESEARCH SETTINGS, MAY DIFFER FROM ACTUAL

ENVIRONMENT.

DATA COLLECTED FROM INDIVIDUALS WHO ARE HUMANS

AND HAVE TENDENCY TO BEHAVE ARTIFICIALLY WHEN

BEING OBSERVED.

SUBJECTIVITY OF RESPONDENTS.

DENIEL ON PART OF SOME RESPONDENTS TO SUPPLY

FIGURES OF SALE CITING THE REASON OF SIGNING OF

NON DISCLOSURE AGREEMENT WITH THE BUYERS.

BIBLIOGRAPHY

BOOKS: INTRODUCTIO TO SECURITIZATION by “Frank J. Fabozzi and Vinod Kothari” CREDIT DERIVATIVES AND SYNTHETC SECURITIZATION by “Vinod Kothari”   Securitization Within Economic Sector by “ANDREJ NOSKO” Marketing of financial services BY “Avdhani.V.K.”

WEBSITES: www.rbi.org.in www.nhb.org.in www.psbindia.com www.obcindia.com www.pnbindia.com www.managementparadIse.com www.scribd.com www.iloveindia.com www.projectspadarise.com www.openlearn.open.ac.in www.moneycontrol.coM

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